Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

Gradual BAB Drop Predicted

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WASHINGTON — Any congressional extension of the Build America Bonds program will likely come with a gradual drop in the subsidy rate, and lawmakers may never reduce the rate to the 28% the Obama administration proposed in its fiscal 2011 budget, the top lawyer for the House tax-writing committee told treasurers meeting here yesterday.

At the same meeting, a Treasury Department official said the Treasury’s initial guidance on how to strip tax credits from tax-credit bonds and sell them separately is in the final stages and should be out “very, very, very soon.”

The two men made their ­remarks at the National ­Association of State Treasurer’s 2010 Legislative Conference.

John Buckley, majority chief counsel for the House Ways and Means Committee, told the treasurers that Congress wants to extend BABs, but probably will not immediately drop the current 35% subsidy rate to a more revenue-neutral rate beginning in 2011, as the White House suggested in its most recent budget.

“There is a real desire to extend BABs in the Congress, [but] I’m somewhat dubious you would have this big step down in subsidy rates,” Buckley said on a panel during the NAST meeting. “You won’t see that quick of a drop down, and I doubt you’d see a drop down to that [28%] level, either.”

However, he did not say what the new subsidy rate might be, or how slowly Congress would lower it.

Buckley also pushed back against the recent concerns about BABs that were aired last week by Sen. Charles Grassley. The Iowa Republican, the ranking minority member of the Senate Finance Committee, complained last week that the recent jobs legislation approved by the House that would “BABify” four tax-credit bond programs at high rates would simply line the pockets of Wall Street bankers rather than help state and local governments.

Grassley made similar complaints last month when he asked officials at Goldman Sachs & Co. for information that would show whether they charged higher fees for underwriting BABs than traditional tax-exempt bonds.

But Buckley said higher underwriting fees are “reflections of a new product, and not an inherent problem with the program itself.”

Meanwhile, John Cross 3d, the Treasury’s associate tax legislative counsel who was also on the panel, told the treasurers that stripping regulations are “in literally the final stages of clearance.” But he repeated earlier public warnings that the tool should not be viewed as an immediate cure-all for the fledgling tax-credit bond market.

“It’s not going to be a panacea. Just because you have the ability to strip tax credits very soon doesn’t mean that they’ll be an instant market-fixer,” Cross said. He added there may be “unrealistically high expectations as to what this complex structuring device can do for the market.”

Cross also said allocations of the second $11 billion tranche of qualified school construction bonds should be released soon.

On the jobs legislation, both Buckley and Cross criticized an earlier version approved by the Senate that would have allowed issuers of four tax-credit bonds to receive direct payments from the federal government instead of offering investors tax credits at far lower subsidy rates.

Under the measure, large issuers would have received payments equal to 45% of interest costs and small issuers would have received payments at a 65% rate. In contrast, the programs currently offer tax credits ranging from 70% to 100% of interest costs. The House modified the Senate bill to offer direct payments roughly equal to those rates.

“The disparity in those subsidies is so much,” Cross said. “Who would ever use that?”

Buckley, who played a key role in drafting the House version of the bill, agreed, saying large issuers would likely be better off selling plain BABs than direct-pay tax-credit bonds under the Senate’s proposal.

“It really was not a meaningful transformation of that program into a direct-payment program,” he said.

The House approved a modified jobs bill last week, and the Senate is expected to consider it this week, after clearing legislation to extend expiring tax provisions.